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Analysis: Postal rescue plan faces impossible odds

Mar. 7, 2010 - 04:08PM   |  
By GREGG CARLSTROM   |   Comments
Two alarming reports predicting a catastrophic drop in mail volume and eye-popping losses have officials at the Postal Service trying to figure out a way -- any way -- to avoid ruin. "These are serious problems we now face," Postmaster General John Potter said last week.
Two alarming reports predicting a catastrophic drop in mail volume and eye-popping losses have officials at the Postal Service trying to figure out a way -- any way -- to avoid ruin. "These are serious problems we now face," Postmaster General John Potter said last week. (File / Getty Images)

The U.S. Postal Service is officially in a panic.

Two outside consultants delivered reports to the agency last month forecasting an alarming scenario: Over the next decade, mail volume will plummet between 15 percent and 34 percent and the agency will hemorrhage almost a quarter-trillion dollars.

In response, postal leaders last week pleaded with stakeholders unions, Congress and customers to support drastic reforms: a sharp rate hike next year; the end of Saturday delivery; widespread post office closures; changes to the Postal Service's formula for financing health care benefits for retirees; and deep staffing cuts.

But few of those measures now appear likely to win approval leaving the Postal Service with no clear fallback plan for closing its mammoth deficits. Mailers railed against the prospect of sharp mailing hikes; lawmakers dismissed the idea of shuttering post offices or shortening the delivery week; and unions balked at staffing cuts and even questioned the severity of the Postal Service's predicament.

"The assertion that the Postal Service must initiate major changes in its business plan to survive a grave crisis is false," said William Burrus, president of the American Postal Workers Union, the largest union of postal employees.

Postal officials, though, say these are the only viable options for curing the fundamental ills plaguing its business. They've ruled out other options such as reducing the speed of mail services or eliminating home delivery to cut carrier costs as counterproductive, since they're likely to drive down mail volumes.

"These are serious problems we now face," Postmaster General John Potter said at a mailing industry forum in Washington last week. "We need to pursue all of these options in order to maintain our viability for the remainder of the 21st century."

Potter estimates the agency can close roughly half of its $238 billion 10-year deficit through internal measures, such as raising prices and improving productivity, which don't require legislative approval. To close the other half, the agency wants Congress to approve three other reforms all of which face steep challenges.

Retiree health care

The Postal Service will ask Congress this year as it did last year to reduce its annual payments into a fund earmarked for future retiree health benefits, a change which could save the Postal Service up to $5 billion annually. These payments are legally required nevertheless, getting Congress' approval to reduce them shouldn't be controversial: A recent report from the Postal Service's inspector general concluded that the agency is on pace to overpay billions into the trust fund between now and 2016.

The report concluded that the Postal Service could pay, on average, $4 billion less each year between now and 2016 and still fully fund its retiree health benefits. The Postal Service currently pays about $5.4 billion per year into the fund.

Another IG report, released in January, found that the Postal Service has overpaid $75 billion into its pension fund for Civil Service Retirement System retirees. That overpayment would be enough to fully fund the Postal Service's retiree health benefit obligations indefinitely so the IG recommended Congress allow the Postal Service to use the pension overpayment for health care. Unions have endorsed that idea as a solution to the Postal Service's long-term financial woes.

"I don't believe that weakening our commitment of six-day service will enhance the long-term position of the Postal Service," said Fred Rolando, the president of the National Association of Letter Carriers, which represents city carriers. "If Congress takes action [on the pension plan], the Postal Service will have the financial breathing room it needs to develop a more successful plan."

Staffers on Capitol Hill won't say whether Congress will approve the change though two congressional analysts who follow the Postal Service say it's unlikely, considering Congress' busy schedule and the shortened election-year legislative calendar.

And that move, which postal officials endorse, would only save $75 billion over the next 10 years; that leaves another $40 billion in deficits.

Fewer post offices, fewer deliveries

Later this month, the Postal Service plans to formally ask its regulator, the Postal Regulatory Commission (PRC), to approve a switch to five-day mail delivery. Potter estimated that the switch would save $3 billion annually.

Analysts say they're not sure how the Postal Service calculated that figure. It's significantly higher than what the PRC has projected: Last year, the PRC estimated that moving to a five-day schedule would save $2 billion but also decrease mail volume by about 2 percent.

Potter first proposed five-day delivery during a congressional hearing last year, and the idea has won virtually no support on Capitol Hill. Lawmakers say they're waiting to see the Postal Service's full analysis before making any final decisions, but there's little enthusiasm for the idea.

"There are very few details about this proposal," said Jenny Thalheimer, a spokeswoman for the House Oversight and Government Reform Committee. "We understand that the Postal Service must bring down its costs over time. But we must also keep in mind that mail delivery is an important public service."

Potter also suggested a new way to cut costs: He said Congress should grant the Postal Service the authority to close post offices for economic reasons, something it's not allowed to do under current law. Potter wouldn't offer any specific numbers, but he suggested the Postal Service wants to close a substantial number of post offices, and focus on building business through alternate retail outlets stamps sold at supermarkets, for example and the Internet.

"In an ideal world, that's what we'd like our retail outlet to be a computer," Potter said. "That, I believe, is the future. Being locked into brick-and-mortar is not a healthy situation."

But this proposal, too, will face steep opposition from legislators, who typically support only those post office closures that happen in other peoples' districts. Unions, too, say there's no need for widespread post office closures which would shrink the postal workforce.

‘There is no Plan B'

Few of these ideas are popular, but postal officials, including the Senate-confirmed Board of Governors, say the Postal Service doesn't have any alternative.

"We're well aware that the political process will have to weigh in on our changes," said Louis Giuliano, chairman of the board. "Many of these proposals can only be implemented with legislative change ... and it is absolutely critical that [those changes] be made in a timely manner."

Some analysts have suggested privatizing the Postal Service, a route that some European post offices have followed in recent years. But a report from McKinsey & Co., one of the two consulting firms that studied the Postal Service, said privatization is an unlikely option because of the Postal Service's perilous financial situation.

"Investors require a clear path to profitability before acquisition. ... It's very difficult to go into an [initial public offering] with a business that is losing money and on the decline," said Thomas Dohrmann, a principal at McKinsey. "And the government will have to maintain an explicit, or at least implicit, support for the Postal Service."

Postal managers have also speculated in the past about opening new lines of business, like banking; post offices in some European countries double as financial institutions, with banking services provided either by commercial banks, which pay rent, or by the post itself. But Potter said consultants ruled out that idea, too, because the Postal Service would need billions in working capital to finance those new product lines money it probably cannot raise, considering its current debt levels.

"We can't exercise that option, at least not in the short term," Potter said.

Potter also said many post offices simply don't have enough customer traffic to support banks or retail operations. The average post office sees fewer than 600 customers per week, one-10th the business of a typical pharmacy, and just 3 percent of a supermarket's weekly traffic.

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